Pollution issues cause drop in ASE shares

By Kevin Chen / Staff reporter

Sat, Dec 14, 2013 - Page 13

Shares of Advanced Semiconductor Engineering Inc (ASE, 日月光半導體) declined about 7 percent over the past four sessions, far larger than the broader market’s 0.8 percent decline over the same period, as investors were spooked by signs of escalating pollution problems in the company’s K7 plant in Greater Kaohsiung.

However, the situation could get worse, as more ASE plants in the region were allegedly found to have either been dumping toxic wastewater or have fabricated their waste disposal records, in addition to other alleged serious violations by Greater Kaohsiung’s Environmental Protection Bureau, the Central News Agency reported.

Now, the world’s largest chip packager and tester faces not only a potential halt to its K7 plant, but also protests from farmers and environmental activists, as well as judicial investigations by prosecutors and possibly tougher penalties by the government.

“The situation has become more complicated as a result of sustained media scrutiny. We think the government may be prompted to take action under the pressure of public opinion,” Jonah Cheng (程正樺), chief semiconductor analyst at UBS Securities Ltd’s Taiwan branch, said in a client note yesterday.

Shares of ASE closed at NT$27.65 yesterday, up 0.18 percent from the previous session owing to a net buying by foreign institutional investors, ending three consecutive sessions of declines.

They have dropped 7.06 percent since Monday when news emerged that the company has been discharging toxic wastewater into the nearby Houjin River (後勁溪).

ASE’s Greater Kaohsiung plants account for up to 50 percent of its core business — chip packaging and testing — with the K7 fab in charge of the wafer bumping process for flip-chip packaging alone making up about 10 percent of its total sales, Cheng said.

In the note, UBS devised a framework to analyze the possible scenarios for ASE over the water pollution incident and found that the company could see its earnings per share (EPS) lowered by between 3 percent and 15 percent next year, pending local authorities’ final decision from a partial shutdown for a few weeks, to a shutdown of all bumping facilities in Greater Kaohsiung for a period of time and to a closure of all of its bumping facilities in Taiwan for a few months.

However, the incident could have even more serious ramifications for the company.

“We have not factored the possibility of heavier penalties by the government,” Cheng said in the note.

Thus far, the company has only received a fine of NT$600,000 (US$20,300) from the local environmental protection bureau over the pollution and a penalty of NT$200,000 by the Taiwan Stock Exchange for poor information disclosure.

Barring the pollution-related impacts, UBS forecast the company would see EPS rise to NT$2.63 next year from the estimated NT$2.02 for this year, thanks to contributions from its electronics manufacturing services subsidiary and higher demand for its system-in-packaging business.